Exchange Rate Bands

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Exchange Rate Bands

The range of exchange rates a central bank allows its currency to take. Exchange rate bands are used when one currency links its value to that of another currency but allows it to fluctuate within certain limits. Proponents maintain that exchange rate bands give a currency a certain level of flexibility so that it can respond to market factors while leaving control with the central bank. Critics contend that this system is inefficient and leads to unfair practices in international trade. The Chinese renmimbi is a prominent example of a currency that traditionally has existed within exchange rate bands. See also: Crawling peg.

In late July 2011, the Central Bank of Honduras (BCH) reactivated the exchange rate band system, a scheme under which the dollar fluctuates between two bands, established by the entity that has the power to buy dollars if the exchange change goes towards the lower band, and sell if it is located in the upper limit, in order to increase supply and push the exchange rate lower.

With this weak manufacturing print, the high likelihood of a technical recession, and falling core inflation, we think the conditions are right for the central bank to ease the pace of appreciation of its trade-weighted exchange rate band," Credit Suisse economist Michael Wan said in a note to client.

A desire to maintain an exchange rate band, as in Hungary, or not completely abandoning the targeting of monetary aggregates, as in Armenia, or both in the case of Romania, has slowed the public's understanding of the policy and perhaps limited the public's belief in the bank's commitment to price stability.

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